Trading on the foreign exchange market (FX, Forex) is not the most expensive thing you can do in the world. However, it does have some fees associated with it and otherwise, expenditure is usually dependent on the trader. These can be stuff like subscriptions to the news outlets and financial institutions to get the latest updates about the performance of specific currency pairs.
The market movements on FX is highly associated with the political affairs of the region. For example, the United States Dollar (USD) is very vulnerable to different types of statements from the Trump administration as well as other members of the Grand Old Party (GOP) and their democratic counterparts.
Although, there are many more aspects affecting the health of the USD since it is considered to be a worldwide currency rather than just a national one. Countries all across the globe are moderating their loan values in USD whether it be national debt, individual citizens taking credit from the banks, or even estimating prices for real estate.
The novel coronavirus pandemic has also hit the world with its global shutdown of economies and movement with the addition of strict social distancing rules that have crushed specific markets like the tourism industry, which faces $1 trillion and 100 million jobs lost, and airlines which has reported as much as $84 billion in losses. Due to this, most of the currencies are having gone into a turmoil with extreme volatility and uncertainty ravaging the market.
When one wants to start trading on the foreign exchange market the trader has to keep in mind compulsory costs that are associated with brokers and the usage of the platform. Apart from this, there are additional stuff like technical analysis services, faster internet connection, etc.
For every trade that a trader places there is a certain amount of cost, or commission, associated with the decision. These are usually things that are broker-specific which means that although it is mandatory to pay these fees the pricing may differ from a broker to broker. FX is a great market to start trading on due to the fact that these mandatory costs are quite low in comparison to others like stocks, commodities, bonds, or even cryptocurrencies. A lot of times traders overlook some of these aspects and face financial barriers later down the road.
One of the most common costs that a trader needs to take is spreads and commission fees that are generated by the broker for each trade that a trader places. It doesn’t matter whether you lose money or gain revenue, these costs are basically set in stone and need to be paid one way or another. There are things that need to be taken into consideration while trading though.
For example, new traders may get questions like what is a pip on forex? What is leverage? What is liquidity? Market volatility? Etc. We will not be discussing these topics in detail as they go beyond the scope of this article and will derail the main thematic to quite an extent but we will touch upon most of them to create a general understanding of what kind of costs to expect when trading. It is highly recommended for every trader to familiarize themselves with these terms to make their work a success. We will be speaking about the meaning of “spread” including variable-rate spreads and commission with its calculation process.
What is Spread?
The simplest way to describe the spread is a fee that you pay your broker when you do a trade. The broker will usually quote a trader two different price points. One is for buying, or the bid price in trading terms, and the selling price called an asking price. The difference between these two price points is called the spread. This is how brokers make money and stay in business to offer their services.
The spread is something you will have to pay with every broker. However, the exact amounts will be most probably different from one company to another. To put it into a more understandable way lets have an example. If you, as a trader, want to buy a certain currency pair for 1.3000 once you start the trade the broker is going to put the bidding price of 1.3002. This means that you will be charged 2 pips (0.002 cents) per currency pair meaning that the spread is 0.002 cents or 2 pips.
The same logic applies to sell prices. If you look at the chart and decide that you want to exit at around 1.2998 then the broker will still fill the trade with 1.3000 adding the predefined spread to your trade as a fee.
Variable Rate Spreads
The core concept behind variable rate spreads is that the number is not going to be predefined. This means that the spread will be adjusted according to the market volatility and the currency pair that the trader wants to trade. These are usually used in markets where the volatility rate is higher than usual to offset the possibility of a negative trade on the broker’s side.
It is also worth noting that some brokers may charge a trader commission for executing trades. In these cases, if the broker is reputable, they will not increase the spread and be content with the already preset commission.
A commission is quite similar to the spread when it comes to forex trading. This is the money that is charged by the broker for every trade that a trader makes. However, in this case, the trader must make some kind of profit to overcome the commission costs.
The commission in FX can either be a predefined fixed rate, which is basically something set in stone regardless of the size or volume of the trade or be a relative fee which is dependant on the amount of revenue the trader gets from the successful trade. This can be set per a certain amount of traded money like $1 for $10,000 or $100,000 depending on the broker the numbers may vary.
Some of the additional fees to consider like inactivity fees for example. This means that if a trader does not trade for a certain amount of period they will be charged a certain amount for their inactivity to keep their profiles open. Apart from this, there are minimum amounts of deposits in set amounts of times which can be monthly or quarterly, some costs are also due to things like calling the broker on the phone, etc.
These are usually considered under the label of “hidden fees.” A lot of traders are totally unaware of their existence or do not count them into their business costs but they are very much associated with trading and thus should be taken into account when starting to trade.